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The right way to sell NPS and protect users

LiveMint logoLiveMint 09-06-2014 Deepti Bhaskaran

The newly notified pension sector regulator has issued draft guidelines on distributors and grievance redressal mechanism for the National Pension System (NPS). In the draft, the Pension Fund Regulatory and Development Authority (PFRDA) has spelt out the role and duties of an NPS intermediary for the private sector and has also laid down a framework to handle grievances.

After the PFRDA Act was passed last year and notified in February this year, PFRDA needs to flesh out regulations on various aspects of NPS. To this effect, it has published draft guidelines on various issues ranging from setting up a subscriber education and protection fund to distributor (PoP and aggregators) regulations.

Mint Money takes you through some of the important aspects.

Distribution structure

There are five key entities in the NPS architecture. The first is the central record-keeping agency (CRA), which is the backbone of NPS. It works as a central repository and also looks after administration and customer service functions. Second are the pension fund managers (PFMs) that are entrusted with the job of investing and managing the money, while the NPS trust, the third entity, is responsible for taking care of the funds under NPS. Fourth, the trustee bank facilitates funds transfer across various entities of the NPS system. The fifth link is the point of presence (PoP), more commonly called a distributor. PoPs are the foot soldiers responsible for soliciting customers. In fact, they are the first point of interaction for an NPS investor or subscriber. At present, there are about 63 PoPs with around 34,150 branches. They include prominent banks such as ICICI Bank Ltd and State Bank of India and other financial institutions such as Computer Age Management Services Pvt. Ltd, ICICI Securities Ltd and Karvy Financial Services Ltd.

The draft regulations regarding distributors focus on customer centricity and accountability. PoPs will need to address all the queries of the customer and provide all the relevant information regarding NPS. Their work would involve getting the paperwork done, coordinating with CRA and collecting money from subscribers to give to the NPS trust.

In the draft regulations, the PoPs have been asked to keep customers’ interest paramount, be it at the time of servicing or at the time of selling NPS. They are also needed to help customers make an informed choice, and not mislead them in anyway. To this effect, they will need to make arrangements (by buying adequate liability insurance) to compensate the subscribers for any loss caused due to negligence or fraud on the part of the PoP.

In terms of eligibility criteria, a distributor needs to be regulated by either of the four financial sector regulators—PFRDA, Securities Exchange Board of India (Sebi), Reserve Bank of India (RBI) and Insurance Regulatory and Development Authority (Irda). The entity must be in the business of selling or marketing retail financial products and should have a profitable track record for three out of five preceding financial years. It also needs to have a minimum of 15 branches with full technological infrastructure for electronic transfer of data.

It also needs to have a minimum net worth of `2 crore.

“Nothing much has changed in the eligibility criteria except that the regulator has made it clear that PoPs will need to have branches. This excludes purely online entities,” said Srikanth Meenakshi, founder and director,

The draft, however, does have a provision for online entities as they have been allowed to function as sub-entities of other distributors and sell NPS online on their behalf.

These entities will not be allowed to charge anything extra from the subscriber. “At present, we work through a partnership arrangement with IL&FS Securities Services Ltd to sell NPS online on behalf the PoP. These guidelines have lent legitimacy to such partnerships. After these regulations come into effect, we can become a sub-entity,” said Meenakshi.

The second most crucial change in the draft is that it has allowed companies to function as PoPs so that it can enrol its employees directly into the NPS. The draft states that a company that has at least 300 employees will be allowed to become a PoP to buy NPS for its employees. “This is a positive step as it means that companies will be able to save on intermediary costs and will be able to administer NPS accounts for their employees in-house. This should incentivize companies to enrol their employees into NPS,” said Meenakshi.

But the provision has also drawn criticism. “The job of a PoP is to sell NPS to companies and their employees for a small fee. If companies are allowed to become PoPs, are we not drastically reducing the market for other PoPs? The aim should be to enable distributors to increase NPS penetration within companies; not make them a competing channel,” said Sumit Shukla, chief executive officer, HDFC Pension Management Co. Ltd.

PoPs will be given the licence for five years and will have to apply for renewal thereafter.

Grievance redressal

Like other financial sector regulators, PFRDA, too, has drafted a framework for effective redressal of customer grievances. It has created a two-tier system. All the key NPS entities, also known as intermediaries—such as CRA, PFMs, PoPs and aggregators or distributors of NPS-Lite (a version customized for weaker sections of society)—need to have a designated grievance redressal officer at a senior management level and another at every branch that deals with NPS.

Even though the draft has been written for all the entities of NPS, it’s primarily distributors who will have to handle consumer complaints. For instance, the PoPs will be responsible for receiving grievances from subscribers and communicating it to the CRA.

The intermediaries will have to clearly define the redressal policy and communicate it to customers; especially PoPs, who will also have to follow up until the complaint is resolved. The redressal mechanism has to be made available on the distributors’ websites as well.

The regulations have also expressed a turnaround time of three days within which an intermediary has to acknowledge the complaint and provide the name of the dealing officer and a unique number for future reference.

The outer limit for grievance redressal is set at 30 days. The matter will be considered resolved if it’s not contested within 30 days thereafter. If the customer is unhappy with the resolution or there is a delay of more than 30 days, the customer can escalate the matter to the pension ombudsman, which will then adjudicate on the case.

The draft also has provisions for an ombudsman, as is the case with other financial sectors. A dissatisfied subscriber can further escalate the matter to PFRDA and finally to Securities Appellate Tribunal.

The guidelines are open for public comments until 27 June on

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